Mean-reverting Geometric Brownian Motion (Ornstein-Uhlenbeck process) calibrated to historical silver volatility (~30% annualized) with a 4-year mean-reversion half-life. 10,000 simulations, 60-month horizon.
Five scenarios with different assumptions about drift, volatility, and long-run equilibrium. Each line shows the median price path from 10,000 simulations.
| Scenario | Median Price (5yr) | P(Above Current) | Avg Max Drawdown |
|---|---|---|---|
| Bull: Industrial Boom | $86 | 59% | 56% |
| Base Case | $63 | 34% | 56% |
| Bear: Recession | $47 | 20% | 68% |
| Inflation Hedge / Stagflation | $92 | 65% | 54% |
| De-dollarization | $98 | 68% | 55% |
| Scenario | Median 5yr Price | Probability | Contribution |
|---|---|---|---|
| Bull: Industrial Boom | $86 | 25% | $21 |
| Base Case | $63 | 35% | $22 |
| Bear: Recession | $47 | 20% | $9 |
| Inflation Hedge / Stagflation | $92 | 10% | $9 |
| De-dollarization | $98 | 10% | $10 |
Why $55 as the long-run equilibrium? Below $55, marginal primary silver miners become unprofitable. The AISC range is $19-29/oz, but with sustaining capex, exploration costs, and permitting overhead the true all-in breakeven for NEW supply is $45-55/oz. Above $55, recycling accelerates and substitution research intensifies, creating price resistance. $55 represents the price where supply and demand find equilibrium IF current deficit trends moderate. If deficits persist at ~150 Moz/yr, the equilibrium shifts higher.
What the model does and does not do: The model does NOT predict where silver will trade. It estimates the DISTRIBUTION of possible outcomes given these structural assumptions. The probability-weighted expected price is the center of that distribution. Percentile bands (p10/p25/p50/p75/p90) show the range. P(Above Current) answers: "In what fraction of simulated paths does silver end higher than today?" Average max drawdown answers: "On average, how bad does the worst peak-to-trough drop get along the way?" Both are critical for position sizing.
The ratio simulation models the gold/silver ratio as mean-reverting toward a long-run mean of ~50:1. Key thresholds: dropping below 30:1 would imply extreme silver outperformance (only occurred near 1980 and 2011 peaks). Staying above 50:1 would indicate silver is still playing catch-up to gold. The current ratio of 63:1 is near the historical mean, suggesting fair value relative to gold.
Why further compression is plausible: At prior ratio troughs, the catalyst was always a gold rally PLUS a silver-specific demand surge. In 1980 it was the Hunt Brothers cornering supply. In 2011 it was QE2 flooding markets while industrial demand recovered from 2008. Today the silver-specific catalyst is the structural supply deficit driven by solar PV, which is growing at 25% CAGR with no viable substitute. Unlike 1980 and 2011, this demand driver is not speculative or cyclical. It is mandated by government policy and sustained by solar being the cheapest new electricity source in most markets.
| Ratio Threshold | 1yr | 2yr | 3yr | 5yr |
|---|---|---|---|---|
| 50:1 | 26% | 46% | 57% | 71% |
| 60:1 | 81% | 88% | 92% | 95% |
| 70:1 | 100% | 100% | 100% | 100% |
| 80:1 | 100% | 100% | 100% | 100% |
Demand shocks model discrete increases in annual silver consumption (e.g., accelerated solar adoption, new industrial applications, sovereign silver stockpiling). Each shock is applied as a permanent upward shift in the long-run equilibrium price. Even modest demand shocks (10-15% increase in annual consumption) produce significant price impacts because supply cannot respond elastically.